Personal Finance

Investing in Cryptocurrencies With Your IRA — The Basics

Expertise: Business Management, Personal Finance
80 Articles Written

IRAs are your virtual nest-egg. They’re beloved by investors for the security they provide upon retirement. Lately, the news has been full of coverage — some good, some bad, and some straight-up confusing— about Bitcoin and other cryptocurrencies.

Some investors are even buzzing about self-directed Bitcoin IRAs and other “hot” new products. But before you can decide whether you want to start moving money out of your IRA and toward a cryptocurrency investment, it’s best to have some grasp of what cryptocurrency actually is.

In this article, we’re going to talk about Bitcoin, as it continues to be the most popular and best-known cryptocurrency at the time of this writing. Bitcoin uses blockchain technology to simultaneously anonymize and securely store your funds. If you just looked up the numbers and have decided that you want to buy Bitcoin, like, right now right now, take a deep breath. The last thing anyone wants to do is buy on the wrong side of a bubble. There’s been lively public debate about whether Bitcoin is, in fact, a bubble.

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It’s no wonder investors are asking more and more questions about Bitcoin, since its value saw dramatic increases through 2016 and 2017. The most popular of these questions is whether it’s “real” money.

Is Bitcoin “Real” Money?

Bitcoin and other cryptocurrencies are definitely real money in the sense that you can spend them on all manner of goods and services. And they can also be held in your IRA. As a matter of fact, your IRA can hold nearly anything, with only  a few exceptions such as life insurance and collectables.

Related: Bitcoin or Real Estate: Which is the Better Investment?

Other Types of Cryptocurrency  

Bitcoin gets all the press, but other cryptocurrencies include Dogecoin (which is basically identical, from a technical standpoint, to Bitcoin), Ethereum, and LiteCoin.

Cryptocurrencies are taxed, just like any other type of income that makes its way into your IRA. The taxman even lends them validity, in his own way. The IRS has declared that cryptocurrencies are property, and as such, profits from sale are treated identically to capital gains. So yes, you can legally profit from this increasingly popular form of investment, but if you’re going to stick it in your IRA, you want to ensure that you do so correctly.

Setting Up an IRA That Accepts Cryptocurrency

This is going to be trickier than just shuffling around your traditional assets and cash, but many investors find it’s worth the effort. Just ensure that you’re taking all of these factors into consideration if you choose to use cryptocurrency with your IRA.

Ensure You’re Using The Right Type of IRA

In this case, you’re shooting for a self-directed IRA that permits the use of alternative assets. You should be able to research whether your current custodian is among those who offer the self-directed IRA. If not, start looking for a custodian who offers this product today. Once you’re self-directing, crypto investments are simple.

Transfer Assets Into Bitcoin

We’ll go into much more detail on exactly how this is done below, but the long and short of it is that once you have the correct type of IRA, all you need to do is make a contribution to it using Bitcoin. You’ll use more or less the same procedure that you would for a cash contribution, but first, you’re going to need to buy your first Bitcoin products.

Options for Buying Bitcoin for Your IRA

All of the options for converting cash or funds to Bitcoin involve using a wallet technology. Depending on the type of Smartphone you use, you should be able to find a reputable wallet app like Ethereum or Coinbase for this purpose.

The wallet essentially serves like your identifier for showing that you are the owner of the virtual currency. You can’t do much business with Bitcoin without a wallet — it’s also how you get paid by or pay someone else in Bitcoin.

Some third-party apps like Coinbase allow you to simply attach the business checking account from your LLC to the app-based wallet and transfer U.S. dollars into Bitcoin directly. This process can also be engaged in various online exchanges, where this is known as a USD-BTC (Bitcoin) transaction.

Related: Is This a Bitcoin Bubble? An In-Depth Look at the Bitcoin Phenomenon

There are also technologies that allow you to acquire Bitcoin by either buying it directly from another investor, or increasingly, using Bitcoin ATMs. Some websites have even enabled local transactions where investors meet up and perform a wallet-to-wallet transaction.

Bitcoin ATMs are booming where I live, in Austin, Texas. We have them all over the city. These are a slightly newer technology that were invented in response to demand for instant transfers from cash to Bitcoin. The machines are all a little bit different depending on vendor, but a quick internet search should help you figure out if there’s one near you. Typically, you will want to use a smartphone wallet like one of those mentioned above. The machine will associate your phone number with the transfer. You may need to bring ID — the law and business practices regulating this vary from state to state and machine to machine.

So, I hope that clears up any questions about whether Bitcoin and other cryptocurrencies are “real” money (or as it turns out, property) that can be used to fund your IRA or be used for other investment purposes. While the technology is certainly still evolving, the financial system is responding with more products to make cryptocurrency investment ever-simpler. Whether this is a good idea for you is a question for your advisors. As always, I’m happy to answer any questions you may have on the subject based on my experience as an attorney and fellow investor.

Have you invested with Bitcoin or other cryptocurrency?

Share your experience below!

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real est...
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    Kole K. Investor from Farmington, Missouri
    Replied about 2 years ago
    Putting wealth into a crypto currency IRA seems to defeat the entire purpose. Cryptography is used to secure value in a “crypto” currency accessible via a private key. If you do not hold the private keys to access that value then you do not control that value, someone else does. History has proven time and time again that private keys are easily stolen from these third party custodians. ALWAYS HOLD YOUR OWN PRIVATE KEYS (cold storage on air gapped devices, physical “paper” wallets or hardware wallets) or do not even bother with crypto currency.
    J Ulm from Watertown, Wisconsin
    Replied about 2 years ago
    Using a Self-Directed IRA vehicle to purchase is a great idea, however, leaving the Private Keys in the hands of someone else is definitely not good management. So, Scott Smith, do you recommend cold storage for these investments like Ledger or Trezor? What would the proper way to use offline cold storage for a Self-Directed IRA? A separate Ledger for the Self-Directed IRA?
    Ricardo Baker Flipper/Rehabber from San Antonio, TX
    Replied about 2 years ago
    Feel like I’m falling behind the times. Investing in cryptocurrency with your IRA? I just read another article about purchasing realestate with cryptocurrency.
    Olga Marquez Realtor from Lees Summit, MO
    Replied about 2 years ago
    I mine Ethereum, and I would consider maybe using a portion of monies to invest. However, I would never sink my retirement into crypto. It’s like sinking it into a high risk stock. You can definitely buy real estate and art with crypto currency. It’s already happening. A major art sale of an Andy Warhol just happened via the Ethereum platform in the amount of $5.6 million I believe. I may be off in the actual amount. Silicon Valley is already buying real estate ? with crypto. Paris Hilton was actually just in the press for this too. It’s money. SEC already established that it is not a security.
    Chris Gerrard from Philadelphia, PA
    Replied about 2 years ago
    Very informative article. You’re obviously very knowledgeable on the subject of self-directed IRA’s. I did want to clarify a point that I am eiter misunderstanding or was not aware of : “We’ll go into much more detail on exactly how this is done below, but the long and short of it is that once you have the correct type of IRA, all you need to do is make a contribution to it using Bitcoin ” Doesn’t IRS publication 590-A state all IRA contributions need to be made in US dollars?
    Al Bigonia Investor from Farmington, New Hampshire
    Replied about 2 years ago
    I have a self-directed Roth IRA, and I AM invested in Cryptocurrency in that Roth IRA. I just don’t understand why you would say we have to make contributions in Bitcoin. I don’t make contributions to my ROTH IRA with Fidelity Investments with Stocks. You are a Lawyer, so I just want to be sure I did things right. As you must know the cryptocurrency Exchanges are very conscientious about the RUMORS that they are nothing but drug dealer laundering sites. It was no small or short task just to get an LLC set up that is owned by my Roth, and getting an account opened with an exchange. The whole process, going thru Custodians, etc. took me some money and 7 months. I am assuming they did not lead me astray.
    Scott Smith Attorney from Austin, TX
    Replied about 2 years ago
    Hi Al. I’m sorry that this process was so lengthy and arduous for you! Seven months is a LONG time. But at least now you’re free of the Custodian’s total grip on your funds. My firm sets up these accounts frequently, and normally it does not take that long. We’ve rolled other types of Retirement accounts into Self-Directed IRA LLCs inside of a couple of weeks. I’m not sure what took so long for yours, but I’m glad you have it set up now. If you want to have a lawyer go over your IRA LLC to ensure compliance, that may be the best way to be sure your specific account is set up correctly. I can’t give legal advice to people who aren’t my clients. I can speak to your comment about the exchanges a little bit as a fellow investor. Yes, they have this bad reputation among some less-informed folks because of a lot of bad press. Some people are cynical and believe Bitcoin is just for drug dealers and the Deep Web Markets. That said, it sounds like you know better. One way to dodge the exchange issue is to use a Bitcoin ATM and a wallet you are confident in. One wallet I really like is Coinomi. But that’s me. There are lots of good resources on the web about crypto (including a mighty Reddit sub and lots of stuff here on BP). I’m just a lawyer, but there are some great tech minds out there who could probably give you a more concrete answer on the most secure and reputable crypto exchanges. I’m still educating myself on the finer points of this subject as well. Investing in nontraditional assets means you always have new things to learn about!
    Jeff Astor from Spring Valley, New York
    Replied about 2 years ago
    The good news is that IRAs (and 401ks) that allow you to hold the private keys exist. See here: